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On Monday I posted the transcript from Martin's keynote from eComm Spring 2009.

Today I added Martin's proposed eComm Fall 2009 (Goodbye Minutes, Hello Moments) to the schedule.

I was left with the feeling that it may be worth digging back to the debut eComm in 2008 and having that talk also transcribed. This is found below.
 
Lee:               Please welcome Martin Geddes.  He is a senior analyst at STL [now Head of Strategy, BT].

Martin:          Thank you.  In my day job, I run around the world advising operators and their suppliers about future business models in Telco.  I am a co-founder for Telco 2.0 Initiative [now Head of Strategy, BT] along with my colleagues at STL Partners.  You might have come across our Telco 2.0 blog and other work.  I am a little bit shortsighted. Because I cannot actually read the clock at the back; I'll be talking to you for the next few hours about how to turn the dinosaurs into mammals.  The research that we have been doing in the future business models is around broadband.  It is about rethinking the phone company.

Before we begin, let us look somewhere outside the telecom industry because the process that is occurring for the telecom industry is one that in fact all industries go through, where in their very early days they are immature and very vertically integrated.  Over time, they become more modular. 

Airlines used to cater their own food and they used to maintain their own airplanes.  They lose those functions.  In the financial services industry, the bank used to sell the mortgage to you and keep it on its books for 20 years whereas now, you go to one place to compare mortgages, the brokers go and buy it.  Another brand is the person who sold it.  Someone else securitizes it.  There are lots of different roles in the industry now.  It is a very wholesale-centric industry.

The industry that we found that has the most analogy to telecom was one that also is in the business of shipping stuff around.  Telecom at its heart is about shipping around ones and zeros from one place to another.  It is "tele-com."

An industry that looks very similar in its structural changes that it had undergone was actually the container shipping industry.  I'd like to share with you a few of the things that happened when we went from the old break-box system, which was how cargo used to be shipped around, to putting the physical goods in to standardized-size packets and putting them on standardized-size ships and standardized-size lories and trucks.

Five things occurred.  I think the last one of these gives a very powerful clue as to where the telecom industry needs to go.  The first thing that happened was that all the old pricing structures of the container shipping industry fell apart.  There used to be different rates for different types of freights.  The same thing happening in telecom is that pricing by distance, by geography, by media type, by time of day, by how long you talked, are all disappearing.

The second thing was that certain people in the old ecosystem doubled down on the old model.  So the port of New York for example, in 1970's, invested in lots of IT and new infrastructure to refresh the break-box system and lost 100% of its business.  The port of Newark, which invested in the container system, picked up all the business.

The third thing was that the traffic tends to concentrate on certain places, which are ports where people have to exchange the traffic between each other.  We are seeing the same effect occurring on the internet today, which is the Googleplexes of the world.  That is where all the traffic is concentrating.  There are very strong increasing returns to scale for that infrastructure.  A few people tend to dominate the exchange of traffic on this network. 

But the forth thing related to that was that it was the ports that made the money and not the shipping lines.  We are seeing that happening in the telecom industries.  The assumption in the Telecom boom of the late 1990's was that it was the people who owned the fibers, who would make the money.  It turns out that there are lots of routes between points A and point B.  The people at point A and B are making the money, in particular the places where everyone has to congregate to exchange the traffic. 

But, it was not actually the ports that made the most money.  The company who now is the biggest shipping line in the world, started off as a logistics company.  The logistics companies had the most compelling solution.  The people were able to take the thing from the factory at one end, put it onto a truck, onto a train, take it to the port, put it onto the sea container on the ship, and then do the reverse at the other end.  The ones who managed that whole process were the ones who made the most money.  It was Maersk managed to reverse engineer themselves back into ports and shipping, and is now the biggest shipping line in the world.

The main message from this presentation is that telecos likewise need to learn how to do logistics.  They aren't in the business of innovating in terms of applications to end users, though there are certain things that they can continue to do in that space.  But, the primary business in the future is the logistics, the data, and explaining what that is and what it means.  There is a twist.  The twist is that they need to embed it in what is known as a multi-slide to business model.  I will explain in a moment what those are and how they look like.

Firstly, why is the current model that the telecom industry has screwed?  Since 80% of the industry is voice, we are talking about emerging communications.  I just focus on voice.  We did a survey of around 800 people inside the industry in the fall of last year and asked, "How do you think telephony or voice minutes should be generated five and ten years from now?"  We gave them four options.  Dark red is traditional telephony.  Pink is other forms of telephony offered by carriers within enhanced featrures for IP like wide band audio or in presence.  The green is private voice application like Skype, and the blue is all kinds of non-traditional telephony embedded into Kiosks and into Xbox games and to ClicktoCall and elsewhere.

What people are predicting is that there will be a big shift in the next 10 years into people making calls within the context that the call makes sense, not necessarily using traditional telephone system to make those calls.  The reason for that, I think, is there are really five different completely separate user needs that are built around telephony. 

The basic thing is the call itself, the ability to connect to people and to talk remotely.  We have seen lots of different businesses grow up to try and attack that part of the telecom's business model.  But really, a lot of the phone calls that you hear people make are "I will be there in five minutes.  I am on the train."  They are doing manual exchanges of presence and location data to try and help themselves rendezvous.  When you see someone instant message you on Skype and say, "Is it a good time to call?", it is trying to help time and synchronize that rendezvous process.  So, the people who are good at helping people rendezvous will be controlling the applications in which the calls are being launched.

Then above the call, you have the conversation.  How do we go about triggering calls in the first place?  Like in Gmail, on the left hand side, it has a list of people with whom I have recently interacted.  It is trying to prompt me to make calls and initiate conversations.  Again, it's the people who are able to not just help the rendezvous of a particular time and place, but work out who shall I be talking to next? 

On top of that, you have the context in which relationships are formed.  eBay is a website in which people help form commercial relationships.  You get another context in which the calls will be launched from, and then one in which the carriers weren't in control.

Finally, when you want to have to group communications, then that is a community-based activity.  You see on MySpace and Facebook, communities emerging.  They own the context and therefore, they will control who makes the call and where it is made from. 

A good reason to believe that the operators will not be able to reverse themselves into these different contexts was we asked in the survey, "How well do you think the operators understand the needs of their own customers in their primary product of voice?"  The opinion of people inside the industry is "not very well," which is hardly a surprise.

Therefore, how do the operators go about making any money?  It was not internally driven innovation and new features you are trying to offer to consumers, it was to open up the platform.  But, it is the big question, what is the business model for doing that?  There are lots of telcos out there thinking about API's.  But, API's are not the answer in a sense.  That is just a means to the end.  What is the new business model?

First a bit of education about two sided markets, because they are a relatively new area of economic study.  I'll describe what I mean.  Today's telecom's business model is a one-sided business model for the most part.  They take a relatively simple segmentation between consumers and small business and large business.  They take revenue from those people and they pass that revenue on to suppliers who offer subsidized handsets, interconnect, and the network equipment.  It is a one-sided model that flows from one side to the other side.

In a two-sided business model, you are a platform in the middle that helps to connect two different groups of people.  Those people want to interact through you because you, in the middle, make it cheap and convenient for them to do it.  There is potentially revenue on both sides.  Money could potentially flow in from both sides.  We think that there are all kinds of natural byproducts of the telecom industry; the information that they gather is very, very valuable.

Google, for example, took the social gestures that people were making between websites, which were hyperlinks, treated them as endorsements, aggregated those all together, did a bit of mathematical magic, and got a Page Rank.  That was able to generate the search results.  They managed to retrieve this latent value that was out there in all this data.  The users are investing their most valuable things, which are their time and their money, in making phone calls. 

The telco knows you are making these phone calls.  It is extremely valuable data.  But, they haven't worked out yet a way of building a data-driven business on top of the network.  The data is very, very important to creating a new business model. 

In particular, people like Google are paying increasing amounts of money to get access to some of these kinds of data.  If you look at Google's cost base, it's rising because they have to pay all kinds of partners to get the data that lets them help personalize the marketing messages.  It is the same data that often the telcos themselves already have, as a natural byproduct of offering communication services.

We see three future business models from the highest-level perspective inside the telecom industry in the future.  The first one is traditional retail.  Telcos keep trying to sell you ISP plans and buckets of minutes.  The second one is wholesale from the other side.  It is like an MVNO.  It is a sample of a wholesale business.  Telco just opens up its network and sells that capacity on to some third party, but it has no relationship with the end users who use that capacity.  The third one is the important one.  It is the two-sided model.

To give examples of two-sided businesses, Google is a two-sided business model.  How does it work?  Unlike SalesForce.com, who have to charge for their piece of software as a service, is Google offers free search to the users, offer value to those users.  As a result, they get a huge audience and they are able to offer cheap advertising to advertisers.  You might think you are paying lots of money to Google for your AdWords campaign, but compared to running that same level of effect through traditional media, it is very, very cheap.  They have invested an enormous amount of money in the underlying IT platform and transaction costs in doing so are very, very low.

A very important lesson about why two-sided business models work is two groups of people want to come and interact through you because you are able to offer a very low cost of transacting and interacting.  It is like when Diner's Club launched the credit cards.  You could still pay in the past in a restaurant with cash or a check, but it cost a lot more for the two-sides to do that.  You have to make sure you brought your checkbook with you, that you had the right amount of cash.  It didn't offer any credit position to the user, so you offered value on both sides.

Another good example of a two-sided business model is a company that IPO'd in the UK a year or two ago, which is Betfair.  What they do is they provide online betting services, which would be horribly illegal in this country, but are very popular in the UK.  They joined two groups of people together.  In this case, it is "punters", who want to place its bets, and "bookies." 

What is interesting about Betfair is they started with a one-sided business model.  They were just offering their own bets to the public.  They almost ran out of cash.  They were on death's door and they suddenly opened up an API.  They said "Hey!" to the other bookies, "You have got different odds.  You have got different betting products on political betting, sports betting.  You come along and offer more bets on our platform." 

The founders are now billionaires and Betfair conducts more transactions than all the European stock markets combined.  When a two-sided business model on a platform is successful, it is very, very powerful. 

The new proposition that telcos need to bring into the market is an addition to what they have today.  In today's model, they bundle together voice, video, and data, and try to sell that at retail to the user.  The theory is because the users do not like to shop around a lot.  They buy this bundle and are locked in for a long period of time.  But, there are some fundamental problems with this business model, one of which is the voice problem I said earlier.

The costs of offering internet access are rising fast as people get the tastes of online videos, for example.  We wrote a blog page recently highlighting it.  The first month, in which the BBC launched the iPlayer, its offer of free high-quality content in the UK, it tripled the streaming costs of an ISP whose traffic figures were published.  The move to video and doing it all over broadband is slowly eroding the ISP business model.  In Japan, they are moving huge amounts of v-packet inspection equipment, being installed at the moment.  Korea moved back to metered broadband.  There are some basic fundamental problems in that business model. 

What they need to add on are personalized logistic services for data, which is what worked in the physical goods arena.  The word 'personalized' is also important.  You are not just delivering something from A to B, but you are doing it in the right way for the people who are sending and receiving these things.  I will give you a few examples later.

What do these logistics businesses do?  They do two things.  An example is FedEx.  FedEx is a one-sided business, but it is a logistics business.  They do two fundamental things, one of which is distribution.  They collect things and then they send them over multiple modes of transport from motorcycle couriers to trucks, to airplanes and to multiple forms of delivery.  They offer a whole bunch of value-added services to the people who are sending stuff.  They offer tax management and tracking of parcels, all kinds of things I never even heard of, like 'denied party screening'.  As it turns out, you cannot deliver certain kinds of packages to certain places and people.  They help manage all these processes.

For telecoms, it is very similar.  They have to offer a whole bunch of distribution capabilities to upstream partners.  I'll talk through some examples of those to bring it to life in a moment. 

Secondly, they have to have a value-added services platform for the upstream partners.  It's not just to try to sell ringtones, Java games, and stuff, downstream to the customers and the public.  It's how do you build a bunch of stuff that all the people who want to deliver their applications to the public would benefit from when you're using paid for?

First the distribution platform; operators need to work out how to offer new kinds of wholesale distribution of products.  An example, from in this room, is the Cloud who is a Wi-Fi network, are offering a wholesale product, Truphone. 

When you make a Truphone phone call, you pay an extra three pennies a minutes and you do not have to pay the Cloud as an ISP.  If I'm in a hotspot, I do not have to bring out my credit cards and say, "I need to make a Skype call or Truphone call" and pay your $10 for an hour.  Instead, you pay through the partner.  You do not pay directly to the Cloud.  It is through the partner. 

To take advantage of this change, the users are going to start using voice embedded in other people's applications.  If you want to make money from that, you have to start becoming a supplier to the people who want to offer these applications. 

Another example of that would be 3 in the UK partnering with Skype to offer the Skype phone.  3 is still supplying the minutes and it is making money from this.  But, they have managed to separately brand those minutes and segment their market out. 

The second one, this is really important actually, is video.  The multi-mobile distribution really comes to life with video.  They had Ribbit and yes, we are talking about 13 different ways of doing SIP, which is the multi-mobile thing for voice.  The people who are winning the video game at the moment to people like Sky.  They are taking broadcast content, sending it to the home hub and setup box.  They are taking broadband contents, building caches in the network and also doing Peer-to-Peer redistribution of the content.

There are four different modes of delivery that you can load-balance between them.  Logistics is not being a DUN pipe.  It is a lot more complicated and rich than being a DUN pipe.  It is much harder. 

For products like the Apple TV, Apple have to pay Akamai, or whoever it is; Limelight or one of their compositors today, to deliver all these movies that you buy off the Apple TV product.  The user still has to worry about those 4GB HD files counting against their fare usage plan or counting against their metered usage on a metered ISP plan, which is normal in the UK.

Instead, you offer a content delivery network to Apple and you also say to Apple "For this fee, we will deliver it to the user via one of the delivery modes we have got and we will do it in a way that does not charge the user per megabyte or count against their usage cap."

That is the two-sided model.  There are two parts to it.  You have an existing retail ISP relationship with the user or an IP TV product and you offer these wholesale services to other people who want to deliver other ideas of how you deliver video and other kinds of content. 

The third one is all about packaging together the data and the application in a new way.  The Amazon-Kindle is a good example of packaging together data with a device and not having to pay separately for an ISP plan.  That is the distribution platform. 

Then, there are the value added services.  Telcos today are trying to build one of these, which is advertising, for the upstream partners.  But, there is a problem.  Left hand bar is the size of the telecom industry, middle bar is the size of the advertising industry, and right-hand pixel is the size of online advertising, including Google.  There is not enough money in the right-hand pixel to go and pay for the large declining voice revenues.  The telecom industry goes broke.

So, we have to do two things.  One of which is you have to have to address a much broader range of customers, not just brand advertisers.  The second of which is that you have to have a much deeper range of products for them, not just bombarding users with messages.  Advertising is just a small part of marketing services and making the customer aware of your offer is only one stage in all the business processes that businesses everywhere engage in. 

The job of the telco is to help try and take friction out of all these generic business processes that people have.  A good example, that came from one of the speakers that at our last Telco 2.0 Conference, was VoiceSage.  They help Endocet to deliver washing machines to people who are at home.  By sending people text messages in an outbound phone call two hours before the washing machine is due to be delivered, the miss-rate goes from 25% to 5% and they save tons of money.

The buzzword to take away is communications-enabled processes.  It is by helping to deliver those messages to the user at an appropriate time, that the telco makes money.  They don't just offer a bulk SMS API. 

The example that I have is that I was asked through SMS, by my electricity company, to send the meter reading.  That message arrived when I was abroad.  It is a waste of time.  What a telco offers is an API that says, "We will forward this to the user when they get home."  In fact, not only that, "We will personalize it in that we know that this user does not make phone calls in the morning."  Maybe they are a shift worker.  It is a stupid time to send the user a message.  "We will offer a service by which we will maximize the return rate of meter readings for you."  Rather than getting three or five cents per message, you get to start to charge 50 cents or a dollar for every successful outcome from that process.

How much could all this stuff be worth?  We have done some very detailed modeling of how these new kinds of business model could develop.  This is not forecast.  It is more sizing of the opportunity.  The green at the bottom is how much money the telecom industry will make by selling its stuff it has got today to customers it has today.  There is a small growth in wholesale MVNO's, but the real growth comes from repackaging up the voice and selling it in new ways; repackaging the data and video.

Another example of distribution platform is why couldn't the airline, the British Airways when I flew over here, have been selling me the America calling plan for a week.  They are little scratch cards that you get on the plane that cost you $25 or $50 and I text the secret code when I get here and I get provisioned with a week's worth of calling in America and a bunch of data.  Everyone will profit.  It is finding new ways and context in which to sell the voice and package them up differently.  The value-added service is on top.

I think the distribution platform 10 years now will be about $250 billion a year.  The value added services platform makes just under $100 billion a year.  If you compare it to what will be the total telecom industry revenue by then, we are about 15%.  It is quite plausible in terms of the structural change and timing of it. 

There are five things operators need to do to make this happen and get it right.  The first one is that platforms are all about scale like Google, there can only be one Google.  There can only be one eBay.  There is a Visa network and a MasterCard network and everyone else is tiny.

The second thing is the example I gave with the API and the meter reading.  They had to package up the stuff for the upstream partners.  Lots of the 'opened up the network' initiatives today are run from the technology side of the business.  The API's capabilities are not the ones that the upstream partners need and are not packaged in the right way and are not buyable.  We are seeing that with the advertising example.  Telcos want to get into advertising, but they are not selling it in a way that the partners can buy.

The third one is you need to offer rewards to the users participating in this.  It is like Google giving away stuff for free.  That is the reward.  The fourth one is that if other people are going to build a business on top of your business you have to be fanatical about support.  An important last one, a very subtle one, is that the certain data like location, presence, and call detail records, which I call plutonium data, has to be processed inside special facilities and it cannot leave those special facilities.

Today's 'open up the network' model is "let us offer web services."  "Hey, come and location-dip this user."  I do not mind my electricity company location dipping me 24 hours a day to work out when to send me a text message.  Instead, rather than the Web services model, it would have to be a software agent model or a mixture of the two; it's "How many times to come to the mountain?" 

The software has to come into the telco environment to execute.  It is like the reverse of Ajax, where software comes down from the Web server into your browser to execute.  This is the reverse of that.  Some software has to go up into the server environment to be executed.  It has to be a software agent model. 

Thank you very much.  If you want to read more about it, then we write about this a lot in our blog, telco2.net.  If you like, come to a conference next month in April.  Are there any questions?

Brough:         Thank you, Martin.  We have four minutes left on Martin's time and we are also about four or five minutes ahead of time.  So, where do we have... there in the back.

Audience 1:   On your logistics model, one of the things that logistics companies provide is homologation, but that entails actually opening up the package.  Is that a taboo topic for telcos to tackle or is that something that goes against the large scale of a telco; is that it is more of a long-tail thing?

Martin:          One thing they offer is what?

Audience 1:   Homologation is when you actually repackage for localized use to meet regulatory, customs, and other purposes for that particular region.  I was wondering, basically twisting content, redoing content, and re-braining content.  Is that something that telcos can still do or is that taboo in this model?

Martin:          An example of that in the telecom industry would be transcoding.  Someone wants to distribute a piece of video content.  There is a crisis of carrying in the UK today between MPEG-2 and MPEG-4 in the [27:06.9] TV channels.  There might be all kinds of existing infrastructure and setup boxes out there that only talk MPEG-2 and you want to send out MPEG-4.  They don't talk that.  The person in middle knows who has which boxes and transcodes it appropriately. 

It is not about the packet inspection model.  That is the thing that fell apart in the container industry.  It did not scale opening up the packets to try and charge them differently.  But, you can offer services to people that say "Yes, I will repackage it for you, if you want me to."  There is a difference between forcibly standing in the middle and the two sides wanting to transact through you because you are adding some value.  That is what the telco platform has to be.  It has to be the thing that the two sides want to transact through because it is so efficient and effective.

Tom:              Martin, you said during your talk that Google is paying money right now for the things that the telco already has, in terms of information about customers.  Could you go deeper into that for a bit?

Martin:          For the Google's 10K filings, their cost space is rising.  It's not rising so much through the search business that currently drives the core of their business, but it's really some other activities they're engaging in to try to offer targeted marketing services. 

They are not necessarily buying location dips and stuff from telcos today.  The information they are buying is often just things like demographic information.  They are going to Experia and those other people to try to understand who is where and what they are doing, and that costs some money.  To be able to target and customize adverts, it is not just a question of knowing what search time you entered, but what income group you are in, what zip code are you in. 

They don't have that data today.  That is where their costs base is inflating from.  They have reached the natural limits of how much you can infer from a search key word.  You need to know something about the customer to get to the next stage.

Audience 2:   Martin, are the telcos really in the best position to offer these services?  We have Akamai, which offered cashing outside.  With the telcos in container ships, physical ports are hard to do.  But, with the telcos is almost a reverse situation.  Has the telco infrastructure become a liability making it harder for them to do their start up?

Martin:          It depends on which part of the value chain we are talking about here.  With video, the port is not just the Google plex.  The ports these days are increasing the devices within the home at the setup box in which the traffic is concentrating on.  If you look at the UK market, and the same thing is going to happen here, the subsidy model for the devices means that only Virgin media, BT, and Sky control that environment today.

Whether that is a good thing or a bad thing, you could have an argument about it but, they do.  So, they are in a good position to do the multimodal logistics thing for data, and other people are not.  They have their assets to go and do that.  Maybe in voice you could go over the top like Skype does, but for the heavy weight bulk distribution of video contents, there is a crisis in trying to do everything over broadband.  The reality today is we do not have fiber at every house and the telcos need to be in the logistics business to help the over the top partners deliver this content.  Time is up.

Brough:         We actually are running a bit ahead of schedule so if there is one more question, we can do it.

Audience 3:   Thanks, Brough.  Martin, just building on Tom's question, do you think Google has a better chance of adapting these principles and becoming a real operator threat or do the telcos have enough of a window to make this transition and leverage what they have that Google does not have?  I guess what I want to say is, can a Web base platform win in this kind of environment, or can the telcos still have enough rope to do this right?

Martin:          That is a good question.  The lesson from like SMS is that end users love buying simple, easy-to-use, convenient, prepackaged additional goods.  They will not go and pull together different bits of the experience and eat separately.  Someone like Google who have a two-sided business model, could in principle, use free connectivity to go and offer you ad-funded content and services.  That would become an enormous threat to the telecom industry because if you take out all the cost of billing and all the customer care and stuff, it could happen.

The problem at this moment is that Google only have two narrower business models.  They're only good at advertising.  They are not yet good at the whole marketing services thing.  They have not worked out how, when you see an advert in a billboard and got the QR code and you have to go click the thing, someone in the middle would like to personalize the thing you are going to see.  It is a whole complex ecosystem and value chain there.  But, they have not worked out what to do and there is not enough money in advertising to cover the cost of building even for free infrastructure, stripped of all the billing and marketing and the customer care cost.

I think that the services that you like to offer for free are only compelling users when they are packaged up with the connectivity, that users are not having to go and worry about metered megabytes and downloads and stuff on a mobile.  Google doesn't yet have the power to do that packaging and distribution.  Even the Google Maps mobile are fantastic, how do you get it preinstalled on the handsets?  How do you make it so that the data charges are free and Google pay for it?  It is not just being sorted out yet.  I think we are still five to ten years away from Google having a plausible attack plan on the operators and their core business.

Brough:         I think, at this point, we have used up the rest of the time.  Give a round of applause for Martin.  That is very good.  Thank you.

The 2nd Emerging Communications Conference starts tomorrow. Registration is still open.

The programme guide has been produced and can be downloaded in PDF format here.

Below is the welcome message:-


Welcome to eComm 2009.

Our world finds itself at a critical juncture. Both trillions of dollars and the future of human communications including fundamental access to it are at stake.

For telecom operators and media outlets there is not a migratory way from where we are to the future. There is a clear consumer shift underway that runs in the opposite direction to that of telecom and media incumbents; emergent social practice is increasingly clashing with the very structure and desires of incumbent players.

A battle is unfolding which is taking place across three related planes; between industries that were previously clearly demarcated (telecom, cellular, Internet and media); between distributed, peer-to-peer ecosystems enabled by the Internet versus centralized, command-and-control ways of organizing to deliver services and content; and between opportunistic infrastructure versus tolled infrastructure.

Complicating the drastic change is the fact that the most popular means of communication, telephony, is increasingly broken. The experience and underlying paradigms are now at odds with the time and attention of the people who are talking through it. It's approached the point of being unacceptable and bad for the economy. Yet it's the source of nearly 80% of the multi-trillion dollar per year telecom industry. Worse still for carriers, telephony and SMS revenues will peak in most advanced economies within the next five years.

Yet as the telecom kingdom fragments it's leading to more flexible, finer and more dynamic means of assembly that furthers innovation opportunities.

The transformations emerging in global telecommunications and media, require big thoughts and big bets. We hope that you find eComm the venue for those thoughts to be shared and heard.

We'd like to think that what happens this week will have reverberations globally.

Glad you've joined us.


eComm takes place March 3-5, 2009 at the San Francisco Airport Marriott; a free shuttle ride from SFO airport. You can register here.

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At the start of 2008 I had the pleasure of doing a pre-conference interview with good friend Martin Geddes. We had sat down together for a 15 minute chat. But before we knew it, we had chatted away for over an hour, which we were only forced to terminate only because the batteries of the recorder died. Due to time constraints, only part of the interview was ever published. But since the content quality was so high I put it on my to do list to publish it in full at a later date. I'm glad to say I finally got around to have a new and full transcription done!

(Note: other "Martin media" was his appearance twice on video during the 2008 conference, once for his keynote and once for the wireless innovation panel)

2008-01-12-martin-geddes-full-interview-96.mp3

The run time is 1 hour and 4 minutes.

In the huge transcript below, I've blockquoted Martin to distinguish the pair of us from each other.

So tell me about your Telco 2.0 initiative? What is the Telco 2.0 initiative?

The telecom industry is in a state of flux and it's following a path that other industries have followed in the past. If you look at the physical logistics industry, containership came along and it broke apart the vertical integrated break box system. Instead you got this big steel packet that's been moved around; it became very modular horizontalized industry. The financial services use to be very vertically integrated. The same company that you went to, to go buy a mortgage from, you spent the next twenty years paying that same company and they had a loan on their books. That was it. Now, the moment you've taken out your mortgage, they go and resell that debt on the mortgage market. There are all kinds of specialists who package up and resell it. Telco 2.0 is about moving to a world where vertical integration in the telecommunications industry is coming to an end. You're seeing new industry structures emerge. It's how to remain profitable and alive in that environment.

When you say vertically integrated, my mind instantly jumps to applications. Are you saying that telephony and SMS, these are what I understand to be vertical products, are you meaning by vertical the industry as a whole in some kind of business fashion, or are you meaning applications when you spoke there?

There are many parts of this puzzle. So you are right; there is a question like the macro organization of the industries. Once upon a time AT&T also had Bell Labs. AT&T controlled local and long distance and the technology side.

There's also the vertical integration in what we call the applications stack. Between the application itself, the session control or whatever goes underneath the application to enable it; what pages you have, HTTP; you know they are separate things on the web. Then you have the core transport, the protocols like TCP and IP. Then you have the low level stuff like Ethernet and physical infrastructure. There's a question of integration in that.

There's also a separate question of virtual integration. That was kind of the technology integration. Did the application at the top have to care about what kind of network it was running over?  Is there stuff in the middle hiding that away from it? 

There's also a separate thing which is the commercial integrations. You mentioned telephony and SMS. What's interesting about them is that when you make a phone call or send a text message, it isn't just what goes over some dedicated network specifically for telephony or text messaging. Also, the money flows in the counter direction.

When you send a text message, you go and get charged 10p for sending that message. It's the combination of technical vertical integration and commercial vertical integration that makes different patterns for different types of system for distributing data to users. Let me give you some examples of that.

Take something like a content delivery network that your iTunes, Apple - you want to go and deliver movies over the Internet to end users. The end users will then download it over their standard Internet connection. It's a very low amount of technical integration between the movie and the ISP client. They don't need to know about each other.

But there's a content delivery network somewhere in the middle that Apple is paying that content delivery provider to cache and deliver that movie. So there's money flowing back and forth. It's based on the volume of movies. There's some degree of commercial integration. So you can move the levers back and forth and look at different parts of the puzzle of delivering voice and video and other forms of data. You can get varying degrees of technical and commercial integration.

It seems somewhat complex to say the absolute least. Would you agree with this?

It is complex [laughter], but what's interesting about it is that we currently have this utter total fixation on the broadband ISP product, which is one where the applications have access to no means of transferring money based on who's going to pay for delivering this movie. There's no API for payments to an ISP. I'm happy to go and get the user to download this movie from this website and please, I'll pay for its delivery. Don't count these bytes against the user's monthly usage cap. This is what the application provider would like.

So you've got this total fixation with the broadband ISP product, which has the benefit of separating the applications from their delivery, but also loses in that process the commercial richness of the telephony and the SMS. That's a problem. Although it's complex, the model of different kinds of vertical integration be it technical or commercial, it's very important because the future of the Internet and the future of broadband is largely about putting back into it some of the rich commercial models from other delivery distribution systems like the PSTN fixed telephony system, but without all the technical limitations of old legacy systems.

Surely, if you pay for connectivity, you decide how many Gigs you want, what speed you want, you purchase connectivity as a product, surely it should not be bound in any way to the application. An application you may pay for, you may not pay for, but these are separate things?

There are a number of subtleties to that question. One of which is basic connectivity, what do we really mean?  There are really two parts to that. One of which is getting the pure access part, which is how do I get from my mobile device to the cell tower, or from my device in my home up to the central office?  It's renting that copper pair or that co-axe cable, the fiber that gets me to the place where telco things start to happen.

Then separately from that there's a question of getting the data across the world to where ever it needs to go. What we're seeing is that the access component is relatively steady over time.

Steady in what fashion?

In terms of how people are going to pay for this. Here in the UK, you pay 12 pounds a month to BT for your line rental. That's the access component and separately you pay for an ISP plan; for 17.99 pounds a month you go and get Tesco Broadband [a no frills service]. Now for you the broadband service is at the top.

So, what we're going to see is that the users don't like having to think about how many megabytes and megabits they need. So if you want to go and access the new BBC iPlayer online, and you're on Tesco value broadband, you've only got a one Gigabyte usage limit in the month. The average user is not going to want to start thinking about the bit rate to this streaming video. All they want to know is "Either I'm buying some product, which comes postage and packing included, or it's some ad funded thing from YouTube and Google is paying for the whole delivery of this thing."  What they don't want to do is have to think about megabytes and megabits themselves.

Also, they don't want to have to provision a new set of access every place they go to. So when you go to your parents at Christmas and you spend all Christmas trying to recover from the turkey and pie in the bedroom; to surf the web [laughter] rather than interrupt the relatives, you don't really want all your usage at your parents house to be counted against your parent's ISP plan because they might be on Tesco value broadband and not on the super business class version that you prefer.

So we have to work out how to go and package the access, the data service itself, and the application devices in new and different ways to sell the user exactly the thing they value and no more or no less.

I think one of the best example at the moment is Amazon's Kindle product. You buy this device. It's got EVDO or whatever it is, built in as a network access. It does exactly what it says on the tin; this device will deliver your ebooks. You don't have to think about megabytes and megabits. You don't have to think about where it's provisioned. You don't have to think about hot spots and "Gee, I get the WiFi here and only have cellular there."   It just does it. It's been packaged up perfectly.

So bundling connectivity with a device, a specific device, I can see how it has value. Look at SMS. It's something which is bound to a device and connectivity and it just works. Do you know what the value of the SMS market was last year?

It's about one hundred billion dollars a year.  The figures obviously for 2007 aren't all out yet, but it was pushing one hundred billion dollars, which is bigger than movies and music and the game software industry all put together. There's something special about it, clearly. For the few gigabytes worth of traffic that all the SMS adds up to be, it's a relatively small amount, the users are paying very, very large amounts of money; only if you view that purely from our technical viewpoint. What it's telling us is a couple of things.

One of them is that when you break apart a product into smaller pieces and sell it, by the sachet rather than buy the big bulk bottle, you get much higher margins. When you buy something wholesale, it's generally bought in huge amounts at very low margins. By the time you're selling it in a tiny sachet, the margins go up.

Another thing is that SMS is a distribution system for messages and data. Each of these distribution systems has a large number of attributes, one or two of which are what kind of technical data can it carry and how can you make payments through it? But it has a whole lot of other attributes as well. For example, the difference between SMS and the Internet is that SMS is based on phone numbers; phone numbers are attached to countries. So if you are running the Eurovision song contest and you want people to vote for songs, but they can't vote for the song from their own country, with SMS it's easy to filter out those votes; if Germans vote for the German entries, ignore it.

With Internet you can't, with high certainty, know which country or jurisdiction an IP address is attached to. It's easy to fake it as well. So there is tons of cheating, if you try to do Internet voting for the Eurovision song contest. So it's only by understanding the full suite of attributes that these distribution systems have and their cultural context and their expectations? 

Like Telex, it has particular laws. It has legal force in the way that other forms of communication maybe don't. You have fax and it became a legal form of communication ten or fifteen years ago, even though it existed for longer. You have to look at the whole context of each of these systems.

The clever thing you can do as a telco application provider is to blend together these different systems, to create in effect, new communications media. I think an impressive example at the moment is something like The Sky Anytime box, where it downloads ...

You just mentioned Sky but that is British only?

Sky is a multinational satellite broadcaster but I don't know if this box is available outside of the UK market. This box is their way a telly takes content from the satellite; it caches it on the hard drive inside the box. You can also plug into broadband and download content over broadband. It's a clever little box, they can push down to you what you might want to watch. It merges together broadcast and broadband. Of course, you can have your DVD player underneath the telly as well. There are multiple ways of delivering bits to the user. Sky has blended together the best of several different distribution systems into a new one.

To passive consumers, this is an interactive thing [the Internet]. I am getting slightly scared in case we end up with glorified CD players hanging off the end of networks.

What's the lesson from that Sky example? Or Netflicks. Netflicks is using the Internet as a signalling mechanism and the postal service as the bearer. The postal service is a very efficient way of transferring tens of hundreds of gigabytes worth of data.

I think the important lesson is when you take this to where the cash is; the money is in voice, there's been this fixation with Voice Over IP for a number of years and actually maybe - this is heresy - but maybe the good old-fashioned phone system is really good at transferring voice [laughter]. Time-division multiplexing?  It does constant bit rate voice very well. You have to throw an awful lot of technology at a problem that doesn't exist to try to persuade anyone to move over to Voice Over IP.

Anyone understanding the full context and capabilities of each of these systems should start to think, "Hey, actually maybe what the Internet is good at is allowing new forms of signalling to evolve faster than SS7 or whatever might otherwise allow. Even those things in principle could evolve."

Well it allows niche signalling systems instead some large monolithic controlled block.

Why don't we focus on enabling the IP parts to the thing it does well, which is, "Hey how do we enable the rendezvous in front of this phone call?  How do we send signals and presence data and the picture of where I'm at or vacation information wherever it might be, to help people make phone calls at the right time, is getting it to both of them. " 

Then, stop worrying about trying to do Voice Over IP until the technology is upper duper mature and people decide that we can't possibly afford to maintain two networks, which is quite a long way away still. Let the phone network do what it does well, which is phone calls.

So, for 2008, you're promoting TDM? [laughter]

Oh, yes. [laughter] TDM ... the future is in...

In TDM. We bypassed it and now we realize we should have just stuck on it. [laughter]

Embrace, extend, extinquish - yes - as Bill Gates would tell you.

I cannot help, and there's so many topics you've cast up and so many things I want to ask as usual, but immediately on that point what do you feel will be of BT21CN then?  Because with British Telecom's 21st century network they are going to switch off their TDM in say 2011.

21CN is a really big thing. There are lots of different parts to that project. If we're just focusing on the voice network part itself, I'm not privy to how they start paying their suppliers for the TDM equipment, and what the situation would have been with end of life-ing support for their equipment and the like and spare parts.

Well, BT is on record as saying they're going to be saving one billion a year in OPEX.

So by spending a large number of billions you have CAPEX you get OPEX savings. I am not privy to the figures. But, what I would be tempted to do was look at how long it's been from inception to delivery for 21CN.

How it was sitting now, I went to the BT website and it said 21CN will be turned on at this road in Edinburgh in 2011. It's the beginning of 2008 and in my book, that's an awful long time to be planning a technology project over in this environment.

You could have built a wrapper around the existing voice network, offering web services and other capabilities, and started to enable lots of the quote "advanced services" that the 21CN would offer years earlier if you had wanted to.

Maybe this [BT21CN] is a longer term approach. Maybe it [not doing BT21CN] would have given you incremental services whereas with BT21CN it is going to give you something which is going to be suitable longer term. You can do more with it because it's an entirely new network, a very fast network.

You can see the allure of moving to an all IP network, but you also have to understand the high risk of having any project that has a five to ten year implementation timescales. Because remember that whatever protocol and architecture that you are choosing at the outset might be obsolete by the time you get to the end. Look at SIP, which was the obvious clear winner out of all the IP signal protocols, even that has its problems. It's got it's architectural mistakes.  It's got incompatibilities. It's been an absolute nightmare to get everyone to have the same understanding of what this particular SIP message...

You mean it's not the session initiation protocol, but the subject to interpretation protocol?

Yes, absolutely [laughter]. And as a result, the chances of SIP itself being exposed to the application developer and being in the interoperability layer, probably isn't going to happen.

Then how do you expose it to the application developers?

I think that these things, if not IMS is all about 'they're good at certain things' and you need to understand what they're good at. What is SIP or IMS good at?  Well, it's good at provisioning, doing signalling to say, "Hey, Tom over here has paid a certain amount of money to have a certain kind of traffic be hauled over this network", over some kind of virtual overlay or whatever they are going to do on top of it. It could be a full capacity reserve pipe we're going to pretend runs over this network. Or, it's going to be something that's prioritized; it's going to be best effort or whatever. It's [IMS] good at managing that, provisioning of virtual circuit.

What it isn't necessarily good at is trying to have a common understanding of what some presence message might mean in the future, because it's all contextual to the user. You go on-hook or off-hook even. Even something as trivial as that, having a common understanding of that would be, you might say, if people have speakerphones, or they go three-way calling;  you add these new features in and suddenly what does that old message mean in this new context?  It might not mean the same thing as it used to. Even if technically you get these networks to inter-operate, it doesn't necessarily mean they're inter-operating it in the users mind.

So let the signalling protocols do what they're good at which is help the telco be a logistics provider; a personalized logistics provider for data. That's what telcos are. They haul data around from point 'A' to point 'B', but they do it using a number of means so it could be broadband, could be content delivery network, or edge caching which is where you broadcast something out like Sky, cache it at the edge of the network and then you can redistribute it to other people who on the edge of the network.

You can do this with Sky?

Whether the Sky box has peer-to-peer redistribution, I'll need to go and have a look, but certainly edge caching is a capability that some of these set top boxes have.

What the telco does, just like a logistics provider for atoms blends together rail, sea, land and air transport, telco blends together all these different types of delivery. In voice you have prioritized networks versus best effort versus full circuit switched and packages them up with the application and the device, but it doesn't get involved in the applications themselves.

All they are doing is helping these people get the data from 'A' to 'B', which isn't being just a dumb pipe. It's a lot more complicated than being a dumb pipe. Because you have to slice and dice up that pipe, enable competing and contending uses of the pipe to be prioritized against each other to be able to have much finer grained provisioning of the pipe.

For example, when you're at home and you're accessing your employer's internal sites over VPN, surely your employer should be paying to have all that VPN traffic being hauled. You shouldn't be saying, "Well, I'm paying 20 pounds a month for my broadband. Maybe I'll expense 5 pounds a month to my employer." No, they should be paying for it, even if you haven't got broadband at home at all, as a retail ISP for yourself, you should have to have access to your employer's stuff [via broadband].

Is this not like beginning to say that if you buy a kettle, that somebody else should be paying for the electricity that goes into the kettle and maybe somebody should pay for the electricity going into the washing machine?  Shouldn't connectivity, the ability to haul bits - bandwidth - into the home, shouldn't that be treat just as electricity coming into the home?

It's interesting.

We're falling into the net neutrality thing here.

There are some specific things about the power industry and electricity distribution, which are interesting. This contrasts with the postal system. When you have something delivered over postal system, you can either buy a stamp or you can go and get a prepaid envelope or you can just put it in the postal system and have it run off and not pay postage at all and somebody else then has to go and pay penalty postage at the other end. There are all kinds of different ways of deciding who pays for the thing being posted. It could be the person at either end.

Electricity distribution, a bit like broadband, doesn't offer these different payment mechanisms. There are good reasons for this. It could be tied to technological issues. It could the history of the medium itself. In some ways it could be a good thing that appliance has to account for its own usage.

I'm thinking accounting for CO2 production or something. If some old appliance that you have in the house is rated to use 1kWh a month and suddenly it's using three because its fuse is burning out or something, and de-provisions itself from the network, that would be a good.

But, there are actually good reasons why the power network doesn't have this capability. If you take a slightly different example, like the great blackout in the Northern US a few years ago, that was partly caused because they were trying to move to a more horizontal industry structure. They forgot that power distribution was vertically integrated for a really good reason, which was that no matter what you're abstraction was in terms of energy trading, the reality was that you had currents flowing through wires. When you have too much current going through wire it gets hot and it starts to sag. If it sags too far it touches the wire below and they short out and your power system fails. That's what happened. The power line network literally melted because too much power started to go in the induction loop pattern and it all went wrong.

So, you needed someone end to end to be able to manage the whole vertically integrated distributed system. There are historical reasons, not technical reasons why some of these networks don't develop sort of modular layered interfaces.

Sounds to me like you would like to apply a signalling system to the electrical system, by analogy and have our kettles and so forth signal their usage etcetera, and put toll booths in there.

What we're leaning towards, the whole network neutrality debate. Should your power company be able to say "Well, you're British, you live off tea. Without tea you'd perish. So, we're going to charge you lots of money for kettles. But perhaps this house heating, well the Brits are pretty used to living in the cold and damp. They won't notice much if their houses are still cold and damp. We won't charge them very much for heating the house by electrical power." 

If you only had a choice of one supplier, then that would be a bad thing. Because it would allow them to price discriminate amongst all the different uses you have and basically reclaim all the value of electricity for themselves. In a competitive market, it would be a good thing. Now it seems utterly bizarre to think of having to provision a device before you plug it into the power socket, but if you really wanted to manage your power usage better, or be able to go and compare a Bosch refrigerator. On the refrigerator there's the little EU mandated power efficiency chart. It turns out that basically all the refrigerators in the row all say "A", because in the six years since they started or ten years that they started to scheme, refrigerators have all got much more efficient. They all got to the top of the scale. There's nothing best on list tells me, really. . .

But they may never have got there had they not put this A-to-F label on there...

Imagine for a moment, I could go and buy a refrigerator and it came with twenty years of service and electricity included. I could see the full price, the lifetime price of that appliance there in front of me. I don't need to go and say, "That one is 700 pounds but it uses 22 kWh a year and this one..."  The whole thing would be bundled there in front of me.

It would be a good thing and a bad thing in the white goods appliance market, you could argue. But at least have the option. If the power socket was able to say, "Ah, the power going for this device is provisioned to this other account."

But for that to happen you have to have a very rich wholesale market in electricity for the refrigerator maker, to have a refrigerator work regardless of which power company you happen to have chosen as your retail provider for power, so you'd have to various intermediaries and a new market structure.

So then how do you stop them reclaiming all the value?

As long as there's competition at the retail end, so you have a choice...

But that's a major thing; "as long as there's competition."  Most of my American buddies are claiming there isn't competition, there's a duolopy in the US.

And they are right. There's a duolopy in the US. There are some pros and cons of that model. You ask the people who are in the lucky areas where Verizon FIOS has been deployed because the Verizon model said this is a zip code with a nice high income of people who pay their bills and would quite like to have lots of premium direct TV. Well it works to some degree. But unfortunately I think that it will also greatly inhibit the growth of the necessary economic models that will be needed in the future; particularly growth of rich wholesale markets in access and connectivity.

What will inhibit it?

The vertical industry structure you see in the USA; where AT&T and Verizon and a few other companies, dominate the market and you have very limited retails choice; you have choice of either one or two broadband ISP's.

Now the UK market has a thriving, vibrant wholesale market, France has a thriving wholesale market, as a foundation from which to grow new wholesale products, which would enable new kinds of connected appliance to be offered.

So you go out and you buy the Apple TV box and plug it in, you don't have to think about which broadband plan you're on, is it the right broadband plan and fast enough and enough megabytes and gigabytes per month?  It's Apple and it's the iTunes service that has to worry about getting the content onto the box and paying for it.

As long as you don't have a bottleneck in that little access loop stopping retail competition, then the network neutrality debate, this whole bogeyman is like a shadow on the floor. But, the shadow is actually something you want, which is a rich wholesale market.

The idea that Google will be charged extra for delivering YouTube videos, here's the secret, it's a good thing when Google could offer YouTube videos and you could sit there and watch them all day, every day in standard definition, high definition resolution or whatever you want, and Google is footing the bill for you. Today this isn't the case.

Martin, these things you mentioned in the start, sound to me are a double-edged sword. What could happen, excuse my instant pessimism, is that you'll get the same Google video quality but the telco will charge you 5 pence or 10 cents every time you watch a video.

The worst bogeyman fear with network neutrality is Google charging you; your ISP will be charging you to go into something you value highly. That isn't going to happen, it's not going to happen.

Why are you so sure please?

If there's going to be any charges, the charges are going to be to those upstream parties like Google [as opposed to downstream to the consumer]. It's going to be to the people like Microsoft for delivering your ...

It may just give you what you have today, that is the fear; that's where the anger, the sentiment is, which you may even be detecting from me.

But, it's [network neutrality] trying to treat the symptoms caused by a lack of competition in the access bottleneck. You can't cure cancer by giving people more morphine. It doesn't work that way. It seems to take the pain away, but you'll still die. 

In the US market, you need to understand the infrastructure is not part of the telecom industry, basically. The infrastructure is part of a multi-utility access business. Their job is to synchronize up the replacement of the gas pipe with a length of new fiber; all the replacement of older street lamps and the digging up of the road with deployment of the new fiber down the road and you do drops off the side. It's to take the cost out of the thing.

It's advertised over a twenty, thirty or whatever years. The plastic pipe itself might be there for 100 years. It's financed differently, maybe under different ownership structures that are designed to create open access and neutrality. If you want neutrality, neutrality needs to be a different layer [laughter]. It's not the IP layer. It's not layer three. Neutrality has to happen at layer zero and one. When you've got the rights of way and the conduits and the access ducts and maybe the physical fiber or copper, that's where the neutrality needs to occur. They picked the wrong place to go fight a battle. The good news is that if you started initiating network neutrality legislation, I don't think anyone could actually write anything down that would be meaningful and enforceable. So it's largely hot air.

Network neutrality means to me to sell me something called Internet, let me shunt bits backwards and forwards, and don't discriminate those bits in terms of pricing. Is that not something simple?

Let us understand this right. You'd have broadband service providers, people who are selling access to a broadband pipe, and within that today, most of their money comes from offering the Internet product through ISP. Now, within that product, there's clearly a problem today, which is that some or many users have been misled as to what they're being sold. They've been told unlimited, asterisk. What the asterisk says is not unlimited. They've been told Internet access and in practice they're finding that certain protocols and certain destinations are being throttled. It's the mismatch between what the consumers been told and what the reality is, that's the problem; not that less traffic should have been going on.

The evidence of that is that there are ISP's like PlusNet in the UK, who are brutally honest with their customers. They have whole web pages dedicated to saying, "Here's how we're going about shaping our traffic today."  They publish all their current traffic stats on their website day by day. They tell you when you buy the thing, "Hey, we traffic shape and we love it."

If the user buys it, they have their eyes open. They know what's happening; where is the problem? It's between consenting adults?  The problem occurs, much in the market. People's ISP contracts have this clause that "we can do whatever we like whenever we like without telling you about it."  That's wrong.

There's a consumer protection issue there. That was like Michael Powell's "Fourth Freedom", freedom to know what's in the plan. That isn't currently being enforced. You could call it net neutrality, the neutrality of the network, but can you have a very un-neutral ISP plan if you want to, like PlusNet's. It's absolutely fine as long as the user knows about it; is told about it before they buy it.

What it also ignores is that outside of the ISP product, you look at all the other products that the broadband service provider could be offering, all these other wholesale products to say, "We will give you universal access to all government self-service websites..."

Also, if a doctor goes to any person's house and plugs in a different little modem into the phone socket, they will be provisioned to have broadband access while they're at that patient's house, regardless of whether grandma has actually got broadband herself.

So there could be all kinds of other products and services that the broadband service provider offers, which the neutrality thing is irrelevant to. The government or the National Health Service goes out and buys these business-to-business products. Where's the problem? You have professionals buying off professionals. They should know exactly what they're buying and know how to buy it.

You informed me that you've recently published under STL Partners; telco2.net - I think is the best place to look for the STL Partners work, am I right there?  You've recently published a future of broadband report?

We've just finished a six month study on the future of broadband, the future business models of broadband. To do that we did an online survey, which over eight-hundred people responded. We've talked to dozens and dozens of people. We did a lot of in-depth research. We have been comparing the broadband industry to other industries like container shipping, and the power distribution industry. We've been trying to learn the lessons, what we can, from these other industries and answer what does it mean for broadband?

Our conclusions are very much what I've been describing, that is, broadband is part of a multi-network, data logistics business. It doesn't exist in isolation. You have to be able blend together multiple different distribution systems. If you're offering an IPTV, for example some kind of enhanced TV service, you ought to have voting. Then that voting might be done by SMS and actually, if in your little set up box you captured a person's mobile phone number, and authenticate it, they may not even necessarily need to send the message directly from their mobile phone. There are all kinds of different ways of blending together these different systems.

Does that not mean that you're saying broadband providers should start going out and buying postal offices and courier vans and jiffy bags?

Yes, it's the digital equivalent to these. What they need to have is they need to get involved in content delivery networks so there is bulk content, that is not time sensitive. It needs to be cached somewhere in the network. Today, companies like Akamai put their caches in a more centralized locations, but you don't find these caches inside of every DSLAM inside every central office. They cache stuff at the edge of the networks, on your PC, in the set up box, in the home hub, and these go on to bridge different systems so it would be able to have BT Vision box where you can take freeview broadcast TV and cache that. You would be able to take broadband and broadcast and these other systems and be able to meld them together into new things.

They also need to deal with we may call the customs aspect of being a logistics provider. So when shipping sea containers around the world, you have these weight bills and manifests and you have to pay customs dues and stuff like that. The digital equivalent of that is being able to deal with authentication and provisioning for all these different networks and connectivity.

Another part of it is you take the postal analogies. You walk to the post office and at the back of the post office are all the counters where you go and post things. But normally, there are racks and racks or wrapping paper and letters and pens and all kinds of other things you need associated to the postal delivery. That's the value of the services. So on top of the basic logistics business, there are a number of value added services.

In the physical world you have insurance as an example of a value added service. In the digital world examples of value added services would be advert insertion, or quick checking;  so the telco knows where you live because they have a copper cable that goes to the front door, they have been receiving payment from you for a certain period and they know if it good debt or bad debt. Recently the biggest credit checking company in the UK is BT; they did more credit checks than anyone else. Yet, if you're running an application over a BT DSL line, you have no means at the moment of interacting with that very private and personal data.

So there are all these value added services - location, presence and other examples where the telco or broadband service provider is a supplier to people who are building these applications at the top of the network. They are doing things which are natural by products of running the network, a logistics business. They're not toll keepers getting in the way of people actually trying to build their application and deliver it. They're suppliers of the things that these people voluntarily draw on and pay for because they add value to their business, not because the telco's getting in the way.

So is it your position on net neutrality that it's a moot point?  Is that my understanding? 

Pretty much yes, because I've never managed to see a really meaningful definition of net neutrality. I've seen lots of high level superficial definitions, but when it comes to applying those ideas in practice, they're far too woolly and vague. It's just a name for a fear, not a name for a viable policy that any one regulation can adopt.

Have any networks ever been neutral? So when you download something over the Internet from Korea, some piece of content you want to download, and you think, "My goodness, it seems to be going down really fast." You download from outer Mongolia, you think, "Gee, it's going down really slowly." That's because of the really big fat pipe that goes to Korea and the really thin pipe that goes into outer Mongolia. That reflects the relative demand for those areas. You could then say, "It doesn't seem very neutral."  We're discriminating against the outer Mongolians. Well what is your the duty?  What is neutral?  What experience is supposed to be neutral that you're delivering to everyone?

If YouTube suddenly explodes in popularity and it is generating tons of transit costs to ISP's, are they suddenly under obligation to maintain a certain ping time and bandwidth through to YouTube when I go to the website?  What is this neutral thing [laughter], tell me?  Do we have to have regulators imbedded every router on the Internet saying, "I'm very sorry, but you can't route that that packet that way. The ping time is too long. It's not neutral." [laughter] The World of Warcraft players won't be happy.

The fear is being very well defined, the net neutrality fear; if you go to a website which isn't on your telco content partners, like their video partner or their news partner, if you go to a news site that isn't on their partner list, you're going to be charged for reading the news on that site. Is this not a well-placed fear?

If you lived in a market where there absolutely no choice as to which ISP you had, or there was very little choice such as the US, I guess it's possible that the Internet super highway man might then come along and rob you of your valuables as you go past and insist on an extra charge to let you pass.

But actually, what we want to see emerge is a rich wholesale market where Google could come along and say, "Hey, you want to watch YouTube or watch YouTube all day in standard or high definition without any charges and you don't have to worry about going over your fair usage limit or your set cap limit. It's all on us [laughter], keep on watching those adverts, keep on clicking on those little contextual ads. Here's the problem. The current ISP model tries to charge everyone the same amount for a very broad spread of actual usage. But you can't remedy that by going back to metered usage because people hate having a clock put on, and they don't understand megabytes and megabits stuff. You can't traffic shape your way around the problem because the users don't really understand advanced network policy enforcement; obviously there are a small segment of users who do. Some gaming users might be more than happy to be on an ISP that tries to prioritize certain real time flows or holds back peer to peer because they want to have priority in the network for the games.

But by and large, none of those things work out. So, the way to solve it is to take the voice and video traffic, take it out of the ISP product but to do it in a way that is beneficial to the user. The user actually wants it to happen. An example would be that you could watch YouTube videos until your eyeballs fall out because you know that it isn't costing you a dime. You can make phone calls from your mobile device to your work colleagues through your exchange server, to your prospective date through match.com and all these separate voice enabled applications just work and it's all charged back to the appropriate person; back to your employer or back to match.com.

Net neutrality fear is that a bogeymen will come a long a rob you. But the bogeyman really is just a shadow of something we actually want, which is a rich wholesale market.

You said at the start, that there isn't such a rich market in the United States. So their net neutrality fear is therefore very real then?

It's real in that there is a gap between what's being sold at retail by an ISP and what you're actually getting, that Comcast could suddenly come and decide that "we don't want to have this peer-to-peer traffic even though we sold you Internet access." But the solution to that is to restructure the industry so that users have retail competition. They have lots less people trying to compete for their business and if one of them turns out to be a two-faced liar, then you just don't renew with them, you go with somebody else.

That's not going to happen within the current US industry structure. The consequence is that probably the US will fall behind as an industry leader.

Have you given any consideration to open wirelessm, in the 700 MHz type stuff? 

It's very hard to make a call on some of these things because there are certain benefits to vertical integration. It helps to pull more money into the infrastructure layer. You cross-subsidize infrastructure from your overpriced application services because you can control what runs over the network. The problem is then you end up with a very stagnant set of services in the network because everything is gate-keepered by telco. Telco's idea of progress is not the same as everyone else's idea of progress.

So, superficially, open access is pretty attractive. But, it's really unclear how this tension between the commons of the network and the need for innovation and the need to be able to ration out a fixed amount of space is going be worked out. I'm really keen to see the experiment and I think the experiment should be well-run; there should be enough spectrum given enough open access rules. There are a number of different models, potentially. Something like WiFi, which was a bit of a free for as long as the power levels not too high, some were it's open access bits or wholesale; business to business types of transactions going on.

Lets see the experiment run because I don't think anyone is sufficiently clever to understand all the variables involved and how it will work out. Let's see the experiment run many times over in different places and learn from it. At the moment nobody really knows what the outcome will be.

I noticed that you were the only keynote speaker who still hasn't put a final title on his keynote [for 2008]. You haven't submitted any talk text. What are you going to speak about?  You hinted it was different distribution models?

What we've studying is how telecoms is just one of many distribution systems of data and how telco's can turn themselves into being logistic service providers for data. I've been doing a six month study on that.

I was procrastinating about what to talk about because I've also been thinking about the future of telephony, voice and personal messaging. Another option, which I won't talk about, was just how telephony and phone calls are just one layer in a nice, rich, thick five layer sandwich. The sandwich, the pyramid of these things, goes from the top where you have communities. There are a small number of communities which are made up of relationships, which are people. Below relationships you have conversations going on. You don't talk to someone for twenty years if you really don't have a relationship with them.

Yeah, communications are required to have a relationship, right.

The conversation is made up of things like phone calls. I think below phone calls is an interesting extra layer - rendezvous. Although some phone calls are being used to try and help organize the real phone call. There we find the real conversation. Not all the conversation occurs through telephony. Some of it occurs face to face. Some of it occurs through other media like email.

People are often phoning up to say, "I'll be there in five minutes, I'm just running a little bit late. I'm on the train."  There are all kinds of manual transfers of location and presence data, which are being done through telephony, but they aren't phone conversations in that sense. Today's telephony product is very broken in terms of helping people to meet up at convenient times. If I want a call with you, I can't just send through into your requested call list, like your missed calls on your mobile, "Martin would like to have a call with you. At your convenient time, call Martin back."  If I'm unavailable the message temporarily disappears on your phone. If you're on another call, it doesn't try to invite you to call me at the same time.

There's an opportunity to fix the whole rendezvous process. There's an option to fix the conversational process as well. For example, dictating your name, address and credit card number and security code during a conversation with a call center is very inconvenient and painful, whereas, you'd like to just press "1" to release that information.

I think there's a lot of opportunity in terms of money to be made in fixing the problems of telephony. But, in a fifteen minute keynote you couldn't talk about so much. I think I ought to focus on what the phone company becomes which is the logistics service provider for enabling the transport of personal communications data and generally get out of the way of running the phone business.

But you try to milk the existing phone business for all it's worth and help integrate it with all these other revenue generating businesses like ecommerce or vcommerce.

So, why are you coming to the inaugural Emerging Communications 2008 Conference, eComm, March 12-14, 2008, at the Computer History Museum, Mountain View, California?  Why are you coming along?  Why are you putting your ass on a plane in order to do a long haul flight to go over there?

I'll tell you, it isn't for the frequent flyer miles. It's because there's been quite a lot of talk recently about how VoIP has become boring and dull, there's no money in voice and voice is going to be free. That's rubbish and nonsense. It's a complete misunderstanding of the size of the opportunity and how voice and telephony and personal communications are the anchor in which the whole of the telecommunications industry revolves. Despite the fixation on media and entertainment, which seems to drag people off to false alleys all the time.

There's actually a huge amount of opportunity for telcos to turn themselves into platforms that are suppliers of personalization and rendezvous and authentication and payment, credit checking and all kinds of other data than enable conversations to occur. There would be a lot of money in doing this. It's part of the big picture of being the logistics service provider, which would help actually deliver stuff, but don't get in the way of whatever is in the packet.

It's also to share some ideas that we've had within the Telco 2.0 space and our understanding of two-sided business models and some of the key issues and concepts around that.

Plus, look at the speaker line-up. It's such a concentration of the top people in the industry. It was just irresistible to come.

When you said that voice or VoIP is not exciting, why do you say this?

That's what many of people are saying. I think it's because they've got trapped in the idea that the value is all in the media itself. It's in the Voice Over IP. Actually, the value is somewhere else. The value is in avoiding wasted phone calls, people making phone calls and getting to voice mail when they shouldn't get into voicemail.

They've [VoIP crowd]  focused on competing with the existing telephony system on the thing it does best, which is transferring media and not the things it does really badly, which is location, presence, all these other things.

I think voice is going to be an integral part of almost every online application in the future. There will always be other people to talk to. There will always be support and service to talk to. It's a massive opportunity.

Are you saying that voice will become an adjunct to other things of value?

Yes, but it will be done different ways. Not everything will be synchronise voice. There will be a lot more voice messaging going on. People want personal touch. They want to have a sense of the other person they are communicating with, because they hear their voice. But, people won't always necessarily want to have synchronise voice.

But today's voice mail, which is completely disjoined from all the other online activities you engage in, isn't the answer. If I want to send you a voice message without your phone ringing, and do it with and instant online application, how do I set it up so that it delivers at the right time?  If you are off on holiday half way around the world, it doesn't arrive at 3:00 a.m. and wake you up saying, "Beep, beep", and you open your phone, when it's not something urgent. 

I think voice will be a story of the evolution of the web in the next ten years. It probably isn't so much around semantic web all this other geek-friendly stuff. It's around the touchy-feely side of how do you label relationships, conversations, and human touch?  There ought to be a lot more of a woman's touch around some of these conferences; understanding the less logistic side of communications.

When you spoke of that pyramid with communications at the top, actually communities at the top, and relationships underneath and communications underneath that; can you relate that pyramid to social networking sites and telecommunications companies?

Social networking sites are the top three layers of the pyramid then there are communities, they are formed of relationships, and then there are conversations. You can find people, get model groups of people and you can send messages to people.

Phone companies are the bottom three layers of the pyramid, which overlap. They enable conversations. They enable calls, and they enable rendezvous. The rendezvous is that you're setting up a mutually convenient time. I text message you and say, "Call me when you're ready."  It's part of enabling the rendezvous.

These two people over lap, but they aren't necessarily conflicts. So should Facebook spend lots of money enabling voice in their applications? No because we already have mobile phones and desk phones and voice capabilities. The PC is a terrible telephone. Why make it into a telephone?  It's not. So how do you capture someone's mobile number or some other identifier for them and integrate their mobile voicemail with the Facebook voice messaging?  That's the problem it's going to solve.

How do you enable someone to make a phone call within Facebook to somebody else in a way that they can see that the other person is available and wants to talk at the moment and is in a certain context and location?

So in summary where do you see the opportunity in voice?

There is a number of parts. One of which is simply enabling new forms of minutes; new applications which will carry voice and don't necessarily do it using phone numbers or traditional means of telephony. Another one we might call vcommerce which is all the ways consumers interact with enterprises; so it's communications enabling business processes like delivering a parcel to your house and making sure the guy only comes when you are home. Some of it is around vcommerce type activities where you register your credit card number with your phone company or bank details and when you interact with the call center, there is non of this "Habla espanol?"  They know I speak English. It's in my telephony profile.

There is plenty money in enabling these experiences, there is plenty money in eliminating the waste in today's telephony.  Every time I spend minutes looking up someone's number, dialing them and finding it's voice mail, a minute of my time is worth more than the ten pence it cost me to make that call. Actually, a minute of my time, during the day, at billable rates is a lot more than the 10 pence call. If you can save me wasting that minute, trying to phone someone who isn't there, that's worth a lot more than the phone call is worth.

It seems that many people are still living off the ten-year old VoIP as an exciting thing when we don't care so much about the cost per minute of your call anymore, especially with a crash of TDM prices. You seem to be saying let's stop worrying or thinking it's an evolution to try and drive cost of calls down. The electrical path, the physical connectivity costs are nothing. It's really the cost at the social level. The cost of human time and attention seems to be where you're saying the cost is. This is where communications must aim at solving these wastages of human time and attention?

the rendezvous layer, the driver has been the increasing cost of human labor and time, compared to the cost of the phone call. Above the phone call layer, there is the conversation layer. It's mostly enabling better conversations between users and merchants.

I like this very much. You're saying it's not five nines of reliability that matter, unless you're calling emergency services. When you call to say, "I'm at the supermarket; do you want ketchup," you don't really care about five-nines of circuits, I assume is what you're saying?  What you care about is five-nines of successful communications, which mean you don't want to wake your baby up when you call about ketchup. Is this what you're saying?

Yes, at the moment my kids are off with my in-laws. They're two hours ahead of us. I'm not quite sure exactly when the kids are having their afternoon nap. They might still be on British time or on Eastern European time. The last thing I want to do is phone up my wife on the mobile when she's just trying to put one of the kids down to bed for their afternoon nap. What I do want to do is ask her to call me at some point in next half hour because I'm free now. I don't send a text message because that will make the phone go "beep, beep" and will suddenly make the child who is trying to fall asleep go, "What was that noise?" 

So I want better telephony. I want the phone company to help me realize that. To let me have spy holes as to what's going on at the other end of this line, before I press the green button, to make a phone call.

What is the opportunity space?  Is this a large financial opportunity space that you see?

Yes - have I modeled exactly how you do it?  If I had worked out exactly how to make money from it, I wouldn't tell you [laughter]. I'm pretty sure that there is a lot of money in it. Because everyone has been looking under the wrong stone for the last ten years. They've all been looking at how do we arbitrage the metered-minute model. It's just irrelevant. Almost all of the voice 2.0 start-up companies have been centered around this, with a few notable exceptions. It's the exceptions that are the ones that are going to be the seeds in the new business model of save users time, give them convenience.

Who do you think is best leveraged to seize these opportunities, this new land-grab?  Do you think it's the likes of Google or do you feel telcos also are going to play a major role in achieving this land-grab of the financial opportunity space?

A few telcos that open up in terms of application platforms will be successful. They'll be successful because they've turned themselves into logistic service providers for everyone else, not because they can stand in the way [laughter] of people delivering applications they want to deliver. I don't think we've really seen yet, the new raft of communications companies of the future. There are a few I've seen that I've been impressed with, like VoiceSage, who help enable communication business processes, how to integrate telco capabilities with general business processes.

But for the most part, I think these companies have yet to come into existence. The current social networking sites are based around entrapment of the users and trying to capture their personal data, resell it, and do it in the ways that I don't think users will allow them to monetize, ultimately. I think we're still in the early phase.

Social change requires a user attitude change. The Internet mass-market phenomenon is twelve years old, thirteen years old. Despite all the hype, it's still early days. Things don't actually change that fast. People's behavious don't change that fast. I think we've yet to really see the communications companies of the future, but hey come to eComm to start finding them. 

On that note, and especially as you're looking so tired, after sitting here for an hour and a half, chatting with myself, which we all very much appreciate. It's always a nice time to speak with you, Martin. I very much look forward, and I'm sure other people do also, to the half an hour keynote at eComm. I very much look forward to seeing you in Mountain View, California, Martin. Thank you very much for your time.

Thank you, Lee.

(Martin is also on schedule for the 2009 event to give a keynote entitled 'Where is the Money in Voice 2.0?')


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A high definition version will be made available; when available it will be announced on the blog and in the monthly newsletter.

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Last month at the inaugural eComm we decided not to print a programme guide but instead to issue a PDF on a freebie USB keyring. The welcome note read:

We're honored that you joined us at for the first eComm conference. In doing so you've joined history in the making.

This community finds itself --quite suddenly-- in a new world of more open opportunity. Open handsets, open networks and open telecom platforms lend themselves to innovation in the worlds garages and bedrooms. And the signs are promising. Within the last 12 months many important events have occurred. First Apple released the iPhone, a phone running their computer operating system; a high school kid then spent the summer cracking the platform, hacking iPhones went critical, and finally Apple itself was forced to "blink", resulting with the release of an SDK. The FCC stated that the next big block of spectrum would only be auctioned to an open network and Google announced first that it was willing to spend billions to create universal access through wireless spectrum. Then Google announced Android, a new open phone operating system; T-Mobile and Sprint joined the Open Handset Alliance; and even Verizon and AT&T made PR releases about becoming open networks.

We believe a new era requires a new kind of conference. Previous industry talking to the industry type events have yielded nothing save consensual hallucinations. The gap between what telecom operators are doing (or allowing) and what the innovation community COULD do, and where end users are taking us is widening fast.

Communications innovation is being democratized. The winners will be those who embrace it. So welcome to eComm 2008. Let's all create an Emerging Communications Community capable of rethinking the trillion dollar industry together!

Lee Dryburgh
Founder, eComm Media


A high definition version will be made available; when available it will be announced on the blog and in the monthly newsletter.


A high definition version will be made available; when available it will be announced on the blog and in the monthly newsletter.

eComm2008_Michel_Bauwens.jpg
Chair:   The next person on is Michael Bauwens of peer-to-peer fame. Somebody who I really made a personal invite to come over here. As I said, he lives in the "Hills of Thailand". Is that correct? So it was quite an expedition to come over. So, please welcome Michael Bauwens of the Peer-to-Peer Foundation. Thank you, Michael.

Michel:   Thank you. The slide that you see there is basically an overview of what we cover. As you will see, I am not sure you can read it but the green things are the deep changes that we are going through today. You will see that there are changes in ways of knowing, there are the changes in the way you are feeling. I just read a book about young generations in Dutch which says that said sharing is a default mentality amongst the digital natives [the book is called the 'Einstein Generation']. This is one example of how the value systems are changing. Actually, what I want to talk about today is really the changes that are taking place when there is a new mode of production emerging in our society. Basically, what I am saying is that there is a new way of producing value which I call peer production. It is basically the self-aggregation of people through social relationships. If you are familiar with Benkler's book, The Wealth of Networks, you will know what I am talking about.   

I was just talking about a friend I met in the Amsterdam called James Burke. He is with a project called Roomware. This is just a bunch of young people. When they go to a party, they basically want to point their mobile phone and share music and pictures during the party using a randomizer so that everybody can share in the fun and share in constructing the party. There are thousands of projects of young people doing things, inventing things, having social innovation that is happening outside of the boundaries of the corporations. I can guarantee you that this group of young people will be faster with their innovation than 200 paid engineers in Philips. This kind of dynamic is something that we are seeing more and more.

Basically, we are inventing new ways of doing things. What I want to focus on really is on the business models that are involved. I talked for about five minutes briefly yesterday, I think. I said I believe in something called the law of asymmetrical  competition. Basically, what it says is that when a company producing a closed proprietary knowledge refuses any participation from its users and does not create any common value, when it is facing a for-benefit institution like the Mozilla Foundation or the Wikimedia Foundation which is linked to a community producing common value like the Wikipedia or the Linux, that eventually, there will always be a point where that community will make a better product than the corporation.   

If you derive from that the second law which is, two for-profit companies competing with each other with one opening up to participation using open licenses and producing some form of common value, it will be more competitive than the company not doing it. If you believe that is true, then what you get is a little bit of what you see on this slide which is that basically we are moving to an economy where I think, in the United States, only 23% of the people are involved in material production and producing material stuff, so we are clearly the dominant on the immaterial field. If in this immaterial field the place of for benefit production is augmenting, then we can see a good case for growth of peer production.   

Most people think that peer production will be limited to knowledge production to content to free software. But, basically, I think that is a mistake because everything that needs to be produced physically needs to be designed first. Designing a car is essentially not so different from collaborating on free software. One of the pages, if you go to P2PFoundation.net, is called P2P design. It is basically about open design for physical production.   

For example, let us talk about the car. Most people probably know the Oscar Project which, I think is not going well. Last year in Amsterdam, there was an open-sourced car concept model shown at the automobile exhibition, called the Common. One of my associates talked with those people and they said they were very close to negotiating a deal for the production of their design and that they expected production to take place in 2011.   

The thing about peer production is that, as a company, and I can say that as I've have been an entrepreneur for 20 years and I was a strategy director in a large telco, you always innovate relatively, to be better as the competition but, if you do that as a community, let us say the Firefox community, you are always innovating for absolute quality. You want to make the best possible browser. Instead of a product which you freeze at some point, especially if you have no competition, you have a permanent process of innovation. That means that whenever you have an open design community starting a process, and it can take 5,10, or maybe 15 years but, there will always be a point where the open source fridge that they produce will be better, more environmental friendly, more modular, more longer lasting than any design that can be produced by a private company.   

This is a slide that tries to explain the business model. We can do two things. We can define open and closed as a proprietary format, and we can define free and paid. That gives you four quadrants which you can see there. Basically, what everybody knows here is the paid and closed, right? You make something, you have a patent or copyright on it, and then you sell it. This is the classic business model. This is the one that is most on the mind by contemporary developments. In the age where information, knowledge can be copied infinitely at a very low marginal cost, it will be increasingly difficult to protect that information, to protect your designs, to protect your patents. We can see that with free software. We can see that with music, whether they use the law or technology as the DRM, it will be increasingly difficult to stop the undermining of proprietary knowledge.   

Think about the middle ages. Some of the first inventors of the textile machine were killed. But, it was inevitable. Eventually, the textile machinery became an important model because it was more efficient and more productive. Basically, this model is facing two main competitors. The one is closed and free. That is what the book of Chris Anderson is about. It just came out. I have not read it yet. But basically, whenever you are dealing with knowledge, you are competing with somebody. If that other party decides to give its primary commodity to knowledge for free, they will undermine your proprietary  business model. What you do then is you are forced to free up your primary commodity and build a portfolio of secondary services around it. That is something very familiar in the publishing field and in the media field.   

The other competition that you will face is people using open proprietary codes. The same effect is actually free if you like. Free as in free speech and also free as in free beer. These people, of course as the Linux model, will build secondary practices around the free open content. The third one, but it is also competing with you, is the totally open and free alternatives. Think about couchsurfing.com. Some people call it the adventure economy. Couch surfing, I do not know if you have kids who use it, is basically a way to find lodging in the whole world. You want to go to Chiang Mai, if you type it in, you will find about 20 people offering free lodging. You can read their reputation. You can write to them and ask them if you can have lodging and they will look at your reputation. All of this process is entirely without money. It is an exchange. It is a civil exchange of value by civil society which is of course also, in some sectors, counting as a competing modality.   

Basically, if you look at this model, what I am saying is the upper right quadrant is what we have now the most precarious in the future. We will have to look this as a business, the two on the upper left and down right, if you want to make a business. I also make a difference, which I explained very shortly yesterday, and I want to explain it again in a little more detail now. There are three major economic streams that are coming out of peer production and the first is a sharing economy. Look at YouTube. Look at Google. Those companies are no longer producing value by themselves. What they are doing is enabling and empowering sharing to occur, sharing documents in case of Google, and sharing videos in case of YouTube. The motivational people writing documents that you can find in Google, 98% of the documents on Google are not institutional documents. They are written by civil society,a very large percentage of users generate  the content. Most of these people are not doing it for sale. They are producing not for the exchange value. They are producing use value. The model of the sharing economy is that of third party propriety platforms enabling the sharing and lifting of the tension.   

Second example of a business model is a commons model, whereby a community-driven process is creating value, the common value. Think about Wikipedia and Linux as the main examples. Around that, is created  an ecology of businesses adding value. The reason behind that is you cannot sell abundance. The market is about tension between supply and demand. Therefore, if you have something which you can copy for free, it is not going to create the market. But, it is creating a vast opportunity to create added value around the commons. The model we have in the commons economy is not a double model between community and company. It is a triple model.    We have on the one hand the community mostly self-managing it's production of value. We have a new set of institutions which I call for-benefit institutions. Think about the WikiMedia Foundation, the Apache Foundation, Etc., the Mozilla Foundation. These are not for-profit companies. As you see, for example, Wikipedia could make billions of dollars selling advertisements. They are not going to do it. It is not in their interest. Craig's List refuses advertising. The Mozilla Foundation is the same but it is a little different. The Mozilla Foundation makes money by selling the space to Google search, which funds their for benefit infrastructure. Basically, the community of producers at large is not in there for profit. So, we have three players. We have the community. We have the for-benefit institution managing the infrastructure. And, we have ecology of businesses around it.   

I think the key problem for business is how we manage openness and closedness. The basic idea here is that openness creates value but it does not capture it. In order to have market value, you need to capture some form of added value of scarce value. That is the whole thing. You can see that in the competition between MySpace and FaceBook. When MySpace got taken over by Murdoch, whole new kind of measures were introduced to stop the sharing on MySpace and you saw that the growth curve was diminishing. When FaceBook opened up, you saw the fantastic growth of FaceBook happening. Apple, the epitome of the closed company, under pressure of the hacking community, is opening up partially its development to API's. That is the kind of tension that every company is going to face.   

Another problem is what do you do with the dynamic of the community? Profit sharing usually does not work. If the community is there, from a wide variety of motivations and not primarily for profit motivation, paying some people and not others, usually creates what we call crowding out. In other words, if I see that you are getting money for voluntary effort and I am not getting money, then I stop volunteering. Most companies, and I think I mentioned that, like IBM when I spoke with somebody at the company they told me they saved 90% of the software infrastructure costs using Linux. 10% of that savings are sent back to the Linux community but not as profit sharing, as benefit sharing. In other words, it is a general support for the infrastructure of sharing in the commons rather than sharing money with individuals. That preserves the voluntary dynamic in the community.   

This is happening more and more. For example, when I say that peer production is also very important for physical production, I would say two things. One thing is that, typically, you would say capitalism is about entrepreneurship. But, capitalism and entrepreneurship are diverging more and more. The example you could use is the BitTorrent. Bram Cohen had no money. He used a series of credit cards and he produced the most important, most valuable software that we use today for multimedia distribution on the Internet. So what happens, and we can see that in the Web 2.0, is that you do not need capital to start because that is a design process. It is just brains working together with other brains. Capital only comes in, not in the beginning but, at the end. It is when you have success. It is when the users are breaking down your servers, that you need capital. More and more we see entrepreneurs that are creating value by self-aggregating capital.   

I actually already said that. This is a business model. This is another important element. This is the kind of modeling that is done by a man called Xavier Comtesse. He is Swiss. He shows that the evolution is from a corporation towards increased participation. You have passive consumption and you go self-service or do-it-yourself. Co-design up to co-creation. Something is missing there. Basically, what I think is missing is the power of the community. So what I am proposing is to enrich his model by a model of community involvement. What you see there, and I will not have time to go into it but, there is a whole variety of new business models that are emerging not on the side of the polarity of the institution, but on the polarity of the community. It is very important because I think that this is what the new business models are about.   

Classic business is about, I am an institution or corporation, I see atomized individuals organized as a 'mass', and I would practice mass marketing to sell to those consumers. I think the new model is recognizing that the users and consumers are always already connected in various peer groups that they are doing all kinds of self-aggregated activities and value production amongst themselves. Therefore, I will position myself on the side of these communities and see what they need.   

For example, in China, we have these group-buying companies that are very powerful there. As far as I understand it, they are not going to a company and ask what they are selling and then looking for consumers. But, what they are doing is they change the polarity around. They are talking to the consumers and saying "what do you need?" then, with that knowledge, they go negotiate with companies and asking them for discounts for the community. Basically, the model I think will be a model whereby a tribal economy is emerging, whereby businesses are emerging that know from inside-out the needs of a particular community and that creates services around that.    I just want to say a little about the relation between peer-to-peer and the market. It is a pretty clear that peer production can only exist when there is a surplus and abundance in the existing world. In other words, peer-to-peer is depending on the market. There is no doubt about it. But on the other hand, the market is increasingly depending on peer-to-peer or on peer production. Remember, you are all in this business. I had a web company in 2000. The crisis happened. Everybody was saying it is the end of the Internet. There will be no more innovation for a few years. What happened? The opposite, the innovation did not stop without the companies but it increased and it accelerated. That shows that, actually, the results are reversed.   

In other words, innovation is more and more social. It is an emerging property of the network. This is a form of innovation which is more and more prevalent that it is the communites, the exchanges and the sharing within communities that lead to innovation, which are then captured. In the book from Eric Von Hippel, The Democratization of Innovation, he mentions Gatorade, the sports bra, the mountain bike. He describes the sports industry, kite surfing, as all industries where the community lead user innovation is primary and captured by commercial companies after the fact.   

We have dialectic between both. I think there is a problem, which I call the crisis of value which is a following. We are producing more and more use value as communities and as citizens. But, only a marginal part of that use value is captured by monetization. If I had a slide for that, I wouldshow the following. The growth of use value on YouTube is 100 million per day, growing exponentially. But, the growth of the advertising is like this, growing only linearly, and the gap between the creation of use value and the monetization of it is increasing every day. More and more young people choose for passionate production. If you talk to young people, which I regularly do when I go to Amsterdam, "yes, they work." They work for Microsoft, they work for different companies. But, what they really want to do is have a meaningful activity.   

They usually work around projects. In between projects, they want to do their passionate production. This is increasingly so. They define their identity through their engagements in their common projects. They do not say "I work for Microsoft." They say "I work on RoomWare" which is the free software project they are working on. I think this creates a precarity in our society. A precariousness because we do not have a mechanism for funding this common value production even though the market increasingly profits from it. This creates a serious problem.       

In Europe, we have a partial answer for that which is what we call transitional labor market theory. Basically, what we are doing in Europe is creating all kinds of mechanisms that make it easier for people to transit from job to job. Because now, by the time you are 35, you have I think 13 jobs in average. They are trying to smooth out the transitions. What I am saying is that it is actually between the transitions that we are most productive. It is in between the jobs that we actually do the most innovative work.   

I said we are talking about conflicts. So this is a slide I did not produce it. I have the source of it on my slide show. Basically, this shows a new dynamic which is exists between communities and institutions. Again, they are different in YouTube, for example, in the sharing communities where the people who share on YouTube are individual-oriented. They want to share their creative expression. They do not have strong links with each other and, therefore, they are depending on a third party. That does not mean they have no power because the power eventually is the power to leave. And the companies are struggling between the openness that creates value and the closing down that captures the value. But if they close down too much, the user community will be tempted to change and to opt out. We either have a user revolt, which we had in Digg, FaceBook, or we have what we call a forking which is a departure of the user population from that particular site to another one.   

There is a price to pay, however, since people invest in this social network, they put their pictures there and their friends. So, if you are really invested in YouTube or any other social network site, you have a price to pay. This creates a particular social tension between community and corporation. We could call the class struggle of the knowledge society. There are differential interests there. The community wants total openness. We want the social graph. We want to be able to own our identity, to control it, to control our privacy, to move from one network to another. The problem for a company is that if they allow total openness, they are afraid that they lose the control over the scarcity and cannot have a business model because, of course, if you open up totally, then any other competitor can take that value and market it as well. This is a difficult tension that we have in this sharing economy.   

An answer, and this is something that we are working on with the P2P Foundation, is that some people within the sharing community will take a commons-oriented approach and actually produce their own infrastructures. One of the things we do is we monitor all of the communities which decide, for example, "Why do we not make our own video sharing communities and why instead of a centralized server part, why do we not use a distributed even server-less system?" because, basically, what creates the need for proprietary  platforms and the need for capital is the fact that you need a centralized service.   

Can we design around that and actually create true peer-to-peer infrastructures that do not need propriety or platforms? It really depends on each case that we are working on. Most people, if they are happy with a proprietary platform, will not want to make the effort to create an alternative. Basically, this new situation, this new dynamic, creates all kinds of social tensions around different things like who owns the platform, how open and free is it, how much sharing is possible? This is an important issue. Where is the power in a distributed network? In other words, you cannot see it. But, it is usually in the invisible architectures. Why can we not remix in YouTube? It is in the design. Therefore, it is very important to have value-conscious design where the value's diversity and autonomy are actually included in the design itself.   

Another example is ownership of the content. I am not sure it is still that way, but it used to be when you entered your video on YouTube you basically signed away all your rights. I think they have changed it somehow, but I am not sure about the details. This is a kind of recurring problem that when you enter a proprietary site, you lose your rights to your content. Revenue sharing is another issue. How do you solve that? It is not easy. For example, YouTube made 2 billion dollars. It did not give any money back to the millions of people who have created the value. As I said, profit sharing is, obviously, not the good solution because that might actually harm the sharing that takes place. So, how do that?   

I am not sure how much time I still have, but I will conclude with a more political statement which is the following: there is undoubtedly, not just the business aspect of peer-to-peer, but also a political aspect. Here is my five cents worth  of analysis of what is wrong with the world, it is very simple. We have a world today which combines the worst of both worlds. We live in pseudo-abundance, false abundance. We think that we have infinite nature. Therefore, we have an infinite growth machine functioning within a finite environment. I personally do not think that will last very long.   

The second thing we do is we think we need to create artificial scarcities in the immaterial world so that we can create a market in it. Basically, the proposition, of course is just to turn that around. Let us have an economy which recognizes natural limits and let us have an immaterial field of sharing in culture and knowledge where the natural flow, the infinite flow, and the infinite replicability of information and culture are recognized. This political aspect is not my invention.   

If you would look at P2PFoundation.net, we basically recognize three emerging paradigms, three emerging social movements in the world. They are growing everywhere, from spirituality to business to politics and to the following: open and free. It is easy to explain because if you want to peer-produce, if you want to create value through self-aggregation, through sharing and cooperation, what do you need? You need raw material. If that raw material is not open and free, you cannot work together. This creates, in almost every field, free software, open source, open access publishing, open education text books, open reiki, open yoga, open [inaudible]. It creates a wide variety of social initiatives in every field, stressing the need for open and free raw material. The second aspect is participation, which is basically "how can we design social systems?" And the third one would have been commons-oriented output. That is it.   

Chair:    I really want to ask you some questions. I will probably need to limit myself to one because that is just so incredibly important and needs so much reflection. Can you relate what you said to the telecom's industry? I know it is an exceptionally hard question. I believe you can do it.

Michel:    Actually, Lee asked me some questions about the telecom. I used to be the e-business strategy manager or Belgacom five years ago. I told him that I was no longer the expert he thought I was. But, my answer would be the following: the basic problem is about abundance and scarcity. You cannot have a market when you have abundance, therefore, the telcos will never build fiber because they can make money only once while they are building it. Once you have it, there is such an overflow and such an abundance that you cannot market it after that. I think one of the answers I gave you is you cannot absolutely expect the telcos to ever build a fiber infrastructure. They will never do it. It is just totally counter the institutional and commercial interest that they have.   

So how do you do that? I think Brough Turner, I am not sure I pronounced the name right, gave kind of an answer to that. We have three models of production now. It is very important to know that. We have the private way, companies building and selling. We have the public way, centralized planning, public provisioning. But, we also have the direct social aggregation, the peer production, way. The wireless commons is an example of civil society taking up itself the task of building bottom-up through distributed capital this kind of task.

Chair:   We need to do lunch tomorrow. Please thank Michael Bauwens.

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